CHAPTER 2

NON-CURRENT LIABILITIES

PROBLEMS

2-1. (Ruby Corporation)

At 8% At 11%
Bond issue price 1,081,145 962,280
Nominal interest for 2007 50,000 50,000
Interest expense for 2007 43,246 52,925
Premium/discount amortization in 2007 6,754 2,925
Bond carrying value at December 31, 2007 1,074,391 965,205
Nominal interest for 2008 100,000 100,000
Interest expense for 2008 85,671 106,342
Premium/discount amortization in 2008 14,059 6,342
Bond carrying value at December 31, 2008 1,060,332 971,547

Computations:
At 8%
Issue price = (1,000,000 x 0.6756) + (50,000 x 8.1109)
= 675,600 + 405,545 = 1,081,145

A B C D
Interest Interest Premium Bond
Date Paid Expense Amortization Carrying Value
06/30/07 1,081,145
12/31/07 50,000 43,246 6,754 1,074,391
06/30/08 50,000 42,976 7,024 1,067,367
12/31/08 50,000 42,695 7,035 1,060,332
A = Face value x 5%
B = Carrying value, beg of year x 4%

At 11%
Issue price = (1,000,000 x 0.5854) + (50,000 x 7.5376)
= 585,430 + 376,880 = 962,280

A B C D
Interest Interest Discount Bond
Date Paid Expense Amortization Carrying Value
06/30/07 962,280
12/31/07 50,000 52,925 2,925 965,205
06/30/08 50,000 53,086 3,086 968,291
12/31/08 50,000 53,256 3,256 971,547

2-2. (Fire Company)

(a) Issue price
Present value of face value (4,000,000 x P2,033, 600
0.5084)
Present value of interest payments (320,000 x 2,247,552
7.0236)
Issue price P4,281,152
Chapter 2 - Non-Current Liabilities

(b) Amortization Table

Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
3/01/07 - - - 4,281,152
8/31/07 320,000 299,681 20,319 4,260,833
2/28/08 320,000 298,258 21,742 4,239,091
8/31/08 320,000 296,736 23,264 4,215,827
2/28/09 320,000 295,108 24,892 4,190,935

(c)
03/01/07 Cash 4,281,152
Bonds Payable 4,000,000
Premium on Bonds Payable 281,152

08/31/07 Interest Expense 299,681

Premium on Bonds Payable 20,319
Cash 320,000

12/31/07 Interest Expense (298,258 x 4/6) 198,839

Premium on Bonds Payable 14,494
Interest Payable (320,000 x 4/6) 213,333

12/28/08 Interest Expense 99,419

Premium on Bonds Payable 7,248
Interest Payable 213,333
Cash 320,000

2-3. (Metal Corporation)

Market value of bonds 5,000,000 x .98 4,900,000
Market value of warrants 5,000 x 70 350,000
Total issue price 5,250,000

(a) Cash 5,250,000

Discount on Bonds Payable 100,000
Bonds Payable 5,000,000
Share Warrants Outstanding 350,000

(b) Cash (5,000 x 20 x 20) 2,000,000

Share Warrants Outstanding 350,000
Ordinary Shares (5,000 x 20 x 15) 1,500,000
Share Premium 850,000

2-4. (Onyx)
(a) Issue price of bonds with warrants (1,000,000 x 1.03) 1,030,000
Bond price without warrants
1,000,000 x 0.3220 322,000
100,000 x 5.6502 565,020 887,020
Value of share warrants 142,980

(b) Interest Expense for 2007 (887,020 x 12% x 10/12 88,702

10
Chapter 2 - Non-Current Liabilities

(c) Bond carrying value, March 1, 2007 887,020

Amortization through December 31, 2007
887,020 x 12% x 10/12 88,702
1,000,000 x 12% x 10/12 83,333 5,369
Bond carrying value, December 31, 2007 892,389

(d) Cash (1,000 x 30 x 50) 1,500,000

Share Warrants Outstanding 142,980
Ordinary Share (30,000 x 25) 750,000
Share Premium 892,980

2-5. (Celeron Company)

(a) Issue price of convertible bonds 2,000,000
Issue price of bonds without conversion privilege
2,000,000 x 0.5674 1,134,800
200,000 x 3.6048 720,960 1,855,760
Allocation to equity 144,240

(b) Amortization Table

Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
07/01/06 - - - 1,855,760
06/30/07 200,000 222,691 22,691 1,878,451
06/30/08 200,000 225,414 25,414 1,903,865
06/30/08 (1,142,319)
06/30/08 761,546
06/30/09 80,000 91,386 11,386 772,932
06/30/10 80,000 92,572 12,752 785,684
06/30/11 80,000 94,316* 14,316 800,000
*Adjusted; difference is due to rounding off.

(c)
07/01/06 Cash 2,000,000
Discount on Bonds Payable 144,240
Bonds Payable 2,000,000
PIC Arising from Bond Conversion Privilege 144,240

06/30/07 Interest Expense 222,691

Discount on Bonds Payable 22,691
Cash 200,000

06/30/08 Interest Expense 225,414

Discount on Bonds Payable 25,414
Cash 200,000

06/30/08 Bonds Payable 1,200,000

PIC Arising from Conversion Privilege 86,544
Discount on Bonds Payable 57,681
Ordinary Share 960,000
Share Premium 268,863

Carrying value,bonds converted (1,903,865 x 120/200 1,142,319

Face value of bonds converted 1,200,000
Discount on bonds payable cancelled 57,681

11
Chapter 2 - Non-Current Liabilities

Value of equity converted (144,240 x 120/200) 86,544

Par value of ordinary shares issued (120 x 80 x 100) 960,000

06/30/09 Interest Expense 91,386

Discount on Bonds Payable 11,386
Cash 80,000

06/30/10 Interest Expense 92,752

Discount on Bonds Payable 12,752
Cash 80,000

06/30/11 Interest Expense 94,316

Discount on Bonds Payable 14,316
Cash 80,000

06/30/11 Bonds Payable 800,000

PIC Arising from Bond Conversion Privilege 57,696
Cash 800,000
PIC from Unexercised Bond Conversion Privilege 57,696
(144,240 – 86,544)

2-6 (Iron Company)

Bonds Payable 2,000,000
Premium on Bonds Payable (450,000 x 2/20) 45,000
PIC Arising from Bond Conversion Privilege(320,000 x 2/20) 32,000
Ordinary Shares (1,000 x 60 x 20) 1,200,000
Share Premium 877,000

2-7 (Lim Corporation)

(a) Cash 5,500,000

Bonds Payable 5,000,000
Premium on Bonds Payable 200,000
PIC Arising from Bond Conversion Privilege 300,000

(b) Bonds Payable 1,000,000

Premium on Bonds Payable (5,000 x 1/5) 10,000
PIC Arising from Bond Conversion Privilege 60,000
Ordinary Share (200 x 40 x 100) 800,000
Share Premium 270,000
300,000 x 1/5 = 60,000

(c) Bonds Payable 2,000,000

Premium on Bonds Payable (5,000 x 2/5) 20,000
PIC Arising from Bond Conversion Privilege 120,000
Cash (2,000,000 x 1.04) 2,080,000
Gain on Retirement of Bonds 10,000
PIC from Unexercised Bond Conversion Privilege 50,000

12
Chapter 2 - Non-Current Liabilities

Retirement price 2,080,000

Retirement price on account of liability
2,000,000 x 1.005 2,010,000
Retirement price on account of equity 70,000

Carrying value of bonds retired

Face value 2,000,000
Unamortized premium (50,000 x 2/5) ___20,000
2,020,000
Retirement price of bonds (2M x 1.005) 2,010,000
Gain on retirement of bonds 10,000

Carrying value of equity cancelled 120,000

Retirement price on account of equity 70,000
Gain on cancellation taken to equity 50,000

2-8. (Emerald Corporation)

The following table may facilitate the computations required in this problem.
Interest Interest Premium Bond
Date Paid Expense Amortization Carrying Value
12/01/05 - - - 5,386,072
06/01/06 300,000 269,304 30,696 5,355,376
12/01/06 300,000 267,769 32,231 5,323,145
06/01/07 300,000 266,157 33,843 5,289,302
12/01/07 300,000 264,465 35,535 5,253,767
06/01/08 300,000 262,688 37,312 5,216,455
12/01/08 180,000 156,494 23,506 3,106,367
06/01/09 180,000 155,318 24,682 3,081,685
12/01/09 180,000 154,084 25,916 3,055,769
06/01/10 180,000 152,788 27,212 3,028,557
12/01/10 180,000 151,443* 28,557 3,000,000
*Adjusted; difference is due to rounding off.

(a) Carrying value, December 1, 2006 (see, table) 5,323,145

Amortization for one month (33,843 x 1/6) ____5,640
Carrying value, December 31, 2006 5,317,505

(b) Interest Expense for year 2006

January 1-June 1, 2006 (269,304 x 5/6) 224,420
June 1-December 1, 2006 267,769
December 1-31, 2006 (266,157 x 1/6) _44,360
Total 536,549

(c) Carrying value of bonds retired on December 1, 2007

5,253,767 x 2/5 2,101,507
Amortization through April 1, 2008 (37,312 x 4/6 x 2/5) ____9,950
Carrying value of bonds retired on April 1, 2008 2,091,557

(d) Carrying value of bonds retired 2,091,557

Redemption price (2,000,000 x 1.04) 2,080,000
Gain on redemption of bonds 11,557

13
Chapter 2 - Non-Current Liabilities

(e) Carrying value of remaining bonds, December 1, 2007 3,106,367

Amortization through December 31, 2007 (24,682 x 1/6) 4,114
Carrying value of remaining bonds, December 31, 2007 3,102,253

(f) On bonds redeemed: 2008 2009

January 1-April 1, 2008 (262,688 x 2/5 x 3/6) 52,538
On remaining bonds
January 1-June 1, 2008 (262,688 x 3/5 x 5/6) 131,344
June 1-December 1, 2008 156,494
December 1-31, 2008 (155,318 x 1/6) 25,886
January 1-June 1, 2009 (155,318 x 5/6) 129,432
June 1-December 1, 2009 154,084
December 1-31, 2009 (152,788 x 1/6) ______ 25,465
Interest Expense 366,262 308,981

2-9. (Ohio Company) Partial Amortization Table

Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
01/01/06 - - - 12,684,120
12/31/06 1,200,000 1,014,730 185,270 12,498,850
12/31/07 1,200,000 999,908 200,092 12,298,758
12/31/07 1,200,000 983,901 216,099 12,082,659
12/31/09 1,200,000 966,613 233,387 11,849,272
12/31/10 600,000 473,971 126,029 5,798,607
12/31/11 600,000 463,889 136,111 5,662,496

(a) Effective interest (12,734,120 – 50,000) x 8% 1,014,730

Nominal interest (10,000,000 x 12% 1,200,000
Amortization of premium for 2006 185,270

(b) Carrying value of bonds on December 31, 2009 (see table) 11,849,27
2

(c) Carrying value of bonds called (11,849,272 x 5/10) 5,924,636

Call price/retirement price (5,000,000 x 110%) 5,050,000
Gain on retirement of bonds 874,636

(d) Interest Expense for year 2011 (see table) 463,889

(e) Unamortized premium on bonds payable, Dec. 31, 2011

5,662,496 – 5,000,000 662,496

2-10. (Sim Company)

Partial Amortization Table
Nominal Effective Premium Bond
Date Interest Interest Amortization Carrying value
03/01/06 P1,963,000
09/01/06 85,000 88,335 3,335 1,966,335
03/01/07 85,000 88,485 3,485 1,969,820
09/01/07 85,000 88,642 3,642 1,973,462
03/01/08 85,000 88,806 3,806 1,977,268
09/01/08 85,000 88,977 3,977 1,981,245
03/01/09 85,000 89,156 4,156 1,985,401

14
Chapter 2 - Non-Current Liabilities

09/01/09 85,000 89,343 4,343 1,989,744

(a) Interest expense recorded on September 1, 2006 88,335
Discount amortization recorded on September 1, 2006 3,335
(b) Carrying amount of the bonds, September 1, 2006 1,966,335
Amortization through December 31, 2006 (3,485 x 4/6) 2,323
Carrying amount of the bonds, December 31, 2006 1,968,658

(c) Retirement price (at face value) 2,000,000

Accrued interest (2,000,000 x 8.5% x 4/12) 56,667
Amount of cash paid on June 30, 2009 2,056,667

(d) Carrying value, March 1, 2009 (see table) 1,985,401

Amortization through June 30, 2009 (4,343 x 4/6) 2,895
Carrying value, June 30, 2009 1,988,296
Retirement price (at face value) 2,000,000
Loss on retirement of bonds 11,704

2-11. (Lim Company)

(a) Issue price of the bonds
Principal Interest Amount PV Factor Present
Due Date Due Due Due Value
12/31/08 2,000,000 800,000 2,800,000 0.8929 2,500,120
12/31/09 2,000,000 640,000 2,640,000 0.7972 2,104,608
12/31/10 2,000,000 480,000 2,480,000 0.7118 1,765,264
12/31/11 2,000,000 320,000 2,320,000 0.6355 1,474,360
12/31/12 2,000,000 160,000 2,160,000 0.5674 1,225,584
Selling price of bonds P9,069,936

(b) Amortization Table

Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortization Value, end
12/31/07 P9,069,936
12/31/08 2,000,000 800,000 1,088,392 288,392 7,358,328
12/31/09 2,000,000 640,000 882,999 242,999 5,601,327
12/31/10 2,000,000 480,000 672,159 192,159 3,793,486
12/31/11 2,000,000 320,000 455,218 135,218 1,928,704
12/31/12 2,000,000 160,000 231,296 71,296* -0-
*Adjusted; difference is due to rounding off.

(c)
12/31/07 Cash 9,069,936
Discount on Bonds Payable 930,064
Bonds Payable 10,000,000

12/31/08 Interest Expense 1,088,392

Discount on Bonds Payable 288,392
Cash 800,000

Bonds Payable 2,000,000

Cash 2,000,000

12/31/09 Interest Expense 882,999

Discount on Bonds Payable 242,999
Cash 640,000

15
Chapter 2 - Non-Current Liabilities

Bonds Payable 2,000,000

Cash 2,000,000

2-12. (Blue Sapphire Corporation)

(a) Issue price of the bonds
Principal Interest Amount Present
Due Date Due Due Due PV Factor Value
12/31/07 2,000,000 960,000 2,960,000 0.9259 2,740,664
12/31/08 2,000,000 720,000 2,720,000 0.8573 2,331,856
12/31/09 2,000,000 480,000 2,480,000 0.7938 1,968,624
12/31/10 2,000,000 240,000 2,240,000 0.7355 1,646,400
Selling price of bonds P8,687,544

(b) Amortization Table

Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortization Value, end
01/01/07 8,687,544
12/31/07 2,000,000 960,000 695,004 264,996 6,422,548
12/31/08 2,000,000 720,000 513,804 206,196 4,216,352
12/31/09 2,000,000 480,000 337,308 142,692 2,073,660
12/31/10 2,000,000 240,000 166,340* 73,660 -0-
*Adjusted; difference is due to rounding off.

(c)
01/01/07 Cash 8,687,544
Bonds Payable 8,000,000
Premium on Bonds Payable 687,544

12/31/07 Interest Expense 695,004

Premium on Bonds Payable 264,996
Cash 960,000

Bonds Payable 2,000,000

Cash 2,000,000

12/31/08 Interest Expense 513,804

Premium on Bonds Payable 206,196
Cash 720,000

Bonds Payable 2,000,000

Cash 2,000,000

2-13. (KFC Delivery Service)

(a) 6,949,800/9,000,000 = 0.7722 This present value factor for three
periods is under the rate of 9% (Table II, Present Value of a Single
Payment). Hence, effective yield for this transaction is 9%.

(b) Date Amortization Carrying Value of Note

09/01/07 6,949,800
08/31/08 9% x 6,949,800 = 625,482 7,575,282
08/31/09 9% x 7,575,282 = 681,775 8,257,057
08/31/10 9% x 8,257,057 = 742,943* 9,000,000
*Adjusted; difference is due to rounding off.

(c) Interest expense for 2007 (625,482 x 4/12) 208,494

16
Chapter 2 - Non-Current Liabilities

Carrying value, September 1, 2007 6,949,800

Amortization through December 31, 2007 280,494
Carrying value, December 31, 2007 7,158,294

(d)
09/01/07 Land 6,949,800
Discount on Notes Payable 2,050,200
Notes Payable 9,000,000

12/31/07 Interest Expense 208,494

Discount on Notes Payable 208,494

09/01/08 Interest Expense (625,482 -208,494) 416,988

Discount on Notes Payable 416,988

12/31/08 Interest Expense (681,775 x 4/12) 227,258

Discount on Notes Payable 227,258

09/01/09 Interest Expense (681,775 – 227,258) 454,517

Discount on Notes Payable 454,517

12/31/09 Interest Expense (742,943 x 4/12) 247,648

Discount on Notes Payable 247,648

09/01/10 Interest Expense (742,943 – 247,648) 495,295

Discount on Notes Payable 495,295

2-14. (JFC)
(a) 2007 2008 2009
6,949,800 x 9%= 625,482
625,482 x 4/12 208,494
625,482 x 8/12 416,988
6,949,800 x 1.09 = 7,575,282
7,575,282 x 9%= 681,775
681,775 x 4/12 227,258
681,775 x 8/12 454,517
7,575,282 x 1.09 = 8,253,057
8,253,057 x 9%= 743,135
743,135 x 4/12 _______ _______ 247,712
Totals 208,494 644,246 702,229

(b) Notes Payable 6,949,800

Accrued interest 208,494
Total, December 31, 2007 7,158,294

(c) Notes Payable 6,949,800

Accrued interest (208,494 + 644,246) 852,740
Total, December 31, 2008 7,802,540

Notes Payable 6,949,800

Accrued interest (208,494+644,246+702,229) 1,554,969
Total, December 31, 2009 8,504,769

(d)
09/01/07 Land 6,949,800
Notes Payable 6,949,800

17
Chapter 2 - Non-Current Liabilities

12/31/07 Interest Expense 208,494

Interest Payable 208,494

12/31/08 Interest Expense 644,246

Interest Payable 644,246
12/31/09 Interest Expense 702,229
Interest Payable 702,229

12/31/10 Interest Expense (adjusted) 495,231

Interest Payable 1,554,969
Notes Payable 6,949,800
Cash 9,000,000

2-15. (Wendy’s Catering Service)

(a) Present value of note (800,000 x 3.2397) 2,591,760

(b) Date Principal Due Amortization Carrying Value of Note

4/01/06 2,591,760
3/31/07 800,000 233,258 2,025,018
3/31/08 800,000 182,252 1,407,270
3/31/09 800,000 126,654 733,924
3/31/10 800,000 66,076* -0-
*Adjusted; difference is due to rounding off.

(c)
04/01/07 Equipment 2,591,760
Discount on Notes Payable 608,240
Notes Payable 3,200,000

12/31/07 Interest Expense (233,258 x 9/12) 174,944

Discount on Notes Payable 174,944

03/31/08 Notes Payable 800,000

Interest Expense 58,314
Cash 800,000
Discount on Notes Payable (233,258-174,944) 58,314

12/31/08 Interest Expense (182,252 x 9/12) 136,689

Discount on Notes Payable 136,689

03/31/09 Notes Payable 800,000

Interest Expense 45,463
Cash 800,000
Discount on Notes Payable (182,252-136,689) 45,563

12/31/09 Interest Expense (126,654 x 9/12) 94,991

Discount on Notes Payable 94,991

03/31/10 Notes Payable 800,000

Interest Expense 31,663
Cash 800,000
Discount on Notes Payable (126,654-94,991) 31,663

12/31/10 Interest Expense (66,076 x 9/12) 49,557

Discount on Notes Payable 49,557

18
Chapter 2 - Non-Current Liabilities

03/31/11 Notes Payable 800,000

Interest Expense 16,519
Cash 800,000
Discount on Notes Payable (66,076-49,557) 16,519

2-16. (Burgee’s Food Corporation)

(a)
Principal
Date Annual Payment Interest Payment Carrying Value
04/01/07 2,591,760
03/31/08 800,000 233,258 566,742 2,025,018
03/31/09 800,000 182,252 617,748 1,407,270
03/31/10 800,000 126,654 673,346 733,924
03/31/11 800,000 66,053 733,947* -0-
*Adjusted

(b)
04/01/07 Equipment 2,591,760
Notes Payable 2,591,760

12/31/07 Interest Expense (233,258 x 9/12) 174,944

Interest Payable 174,944

04/01/08 Interest Payable 174,944

Interest Expense (233,258 – 174,944) 58,314
Notes Payable 566,748
Cash 800,000

12/31/08 Interest Expense (182,252 x 9/12) 136,689

Interest Payable 136,689

04/01/09 Interest Payable 136,689

Interest Expense (182,252 – 136,689) 45,563
Notes Payable 617,748
Cash 800,000

12/31/09 Interest Expense (126,654 x 9/12) 94,991

Interest Payable 94,991

04/01/10 Interest Payable 94,991

Interest Expense (126,654 – 94,991) 31,663
Notes Payable 673,346
Cash 800,000

12/31/10 Interest Expense (66,053 x 9/12) 49,540

Interest Payable 49,540

04/01/11 Interest Payable 49,540

Interest Expense (66,053 – 49,540) 16,513
Notes Payable 733,947
Cash 800,000

(c) Current portion at December 31, 2008

Notes Payable 617,748
Interest Payable 136,689

19
Chapter 2 - Non-Current Liabilities

Noncurrent portion at December 31, 2008

Notes Payable 1,407,270

2-17.
(a) (South Company
Notes Payable 900,000
Interest Payable 90,000
Cost of Sales 650,000
Inventory of Machine Parts 650,000
Sales 800,000
Gain on Debt Restructuring 190,000

(b) (Jay Company)

Bonds Payable 10,000,000
Interest Payable 900,000
Ordinary Share 7,500,000
Share Premium 3,400,000

(c) (Capshell Company)

Notes Payable 10,000,000
Interest Payable 1,200,000
Restructured Notes Payable 7,459,264
Gain on Debt Restructuring 3,740,736

Present value of future payments

8,000,000 x 0.7972 = 6,377,600
8,000,000 x 8% x 1.6901 = 1,081,664
Total 7,459,264
Carrying value of liability 11,200,000
Gain on debt restructuring 3,740,736

Alternatively, the entry may be recorded

as:
Notes Payable 10,000,000
Interest Payable 1,200,000
Discount on Restructured Notes Payable 540,736
Restructured Notes Payable 8,000,000
Gain on Debt Restructuring 3,740,736

(d) (Solid Company)

Notes Payable 3,000,000
Interest Payable 330,000
Restructured Notes Payable 3,111,024
Gain on Debt Restructuring 218,976

Present value of future payments

3,000,000 x 0.5935 = 1,780,500
3,000,000 x 12% x 3.6959 = 1,330,524
Total 3,111,024
Carrying value of liability 3,330,000
Gain on debt restructuring 218,976

Alternatively, the entry may be recorded

20
Chapter 2 - Non-Current Liabilities

as:
Notes Payable 3,000,000
Interest Payable 330,000
Premium on Restructured Notes Payable 111,024
Restructured Notes Payable 3,000,000
Gain on Debt Restructuring 218,976

21